Economic Booms - The Emerging Economies Experience

The Emerging Economies Experience

Boom–bust episodes have been largely documented in emerging economies. During the nineties, countries like Mexico, Argentina, Malaysia, Turkey, Colombia, Indonesia, Korea and Peru all experienced boom–bust cycles with the consequent collapse in GDP, consumption, non-tradable output sector contraction, capital flow reversals, limited or costly access to capital markets and sharp real exchange rate fluctuations.

In emerging markets the phenomenon of a boom–bust cycle has also been linked to episodes of sudden stops in capital flows and output drops. Following the 1998 Russian economic crisis, the seven largest Latin American countries saw their investment rates plummet from an average of 7.4% per year in the five years prior to the crises to -4.1% in the year to follow. After the crisis ended investment rates resumed their growth at rate of 10% per year. The same episode had a different effect on the emerging economies of Asia. In that region investment dropped from an average rate of 6.06% to -37% in the year after the crisis and resumed at an average annual rate of 6% in the following five years.

Not even among emerging markets the response of economic variables during a boom–bust episode is the same. Some countries are more vulnerable than other due to their particular domestic conditions. Some examples include the extent of liability dollarization which increases the vulnerability of the balance sheet of leveraged agents in the case of a devaluation;